Retlaw Corporation (RC) manufactures time series photographic equipment It is currently at its target debt equity ratio of 0 87 It's considering building a new $57 million manufacturing facility This new plant is expected to generate after tax cash flows of $9 4 million in perpetuity The company raises all equity from outside financing There are three financing options A new issue of common stock The flotation costs of the new common stock would be 9 of the amount raised The required return on the company's new equity is 15 A new issue of 20 year bonds The flotation costs of the new bonds would be 4 of the proceeds If the company issues these new bonds at an annual coupon rate of 8 0 , they will sell at par Increased use of accounts payable financing Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC Management has a target ratio of accounts payable to long term debt of 0 175 (Assume there is no difference between the pre tax and after tax accounts payable cost ) What is the NPV of the new plant Assume that RC has a 35 tax rate (Enter the answer in dollars Do not round intermediate calculations Round the WACC percentage to 2 decimal places Round the final answer to 2 decimal places Omit $ sign in your response )

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jun 05, 2024

Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.87. It's considering building a new $57 million manufacturing

Retlaw Corporation (RC) manufactures time-series photographic equipment. It is currently at its target debt-equity ratio of 0.87. It's considering building a new $57 million manufacturing facility. This new plant is expected to generate after-tax cash flows of $9.4 million in perpetuity. The company raises all equity from outside financing. There are three financing options:

A new issue of common stock:The flotation costs of the new common stock would be 9% of the amount raised. The required return on the company's new equity is 15%.
A new issue of 20-year bonds:The flotation costs of the new bonds would be 4% of the proceeds. If the company issues these new bonds at an annual coupon rate of 8.0%, they will sell at par.
Increased use of accounts payable financing:Because this financing is part of the company's ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of 0.175. (Assume there is no difference between the pre-tax and after-tax accounts payable cost.)

What is the NPV of the new plant? Assume that RC has a 35% tax rate.(Enter the answer in dollars. Do not round intermediate calculations. Round the WACC percentage to 2 decimal places. Round the final answer to 2 decimal places. Omit $ sign in your response.)